Download Are IFRS for SMEs Irresistible Juggernaut for US Financial

Are IFRS for SMEs Irresistible Juggernaut for US
Financial Reporting?
[The Case of Small and Medium-sized Entities (SMEs) in
US]
Emamnew, Assefa Getachew
Department of Accounting
Karlstad Business School
651 88 Karlstad
University Station, Sweden Karlstad
Tel: 054-700 10 00, Fax: 054-700 14 97
E-mail: [email protected]
Outline of the Paper
Table of Contents
I – Introduction
II – Background
1
2
III - Literature review
3
IV -Statements the Problem or the Question
9
V -Presentation (of the work)
10
VI- Conclusions and recommendations
11
I
Introduction
Revolutionary changes are occurring in accounting and financial reporting
standards in the US and other countries. Until 2008, the Securities and
Exchange Commission (SEC) in the US required for financial reporting by
companies traded in the US stock market, that their financial statements either
follow US generally accepted accounting principle (GAAP) or to be reconciled to
US GAAP. The SEC did not accept the International Standards (IFRS) issued by
the IASB. Until the early 2002, Securities Commissions in most countries took
the same basic position toward IFRS as did the United States SEC.
GAAP is used in the preparation of balance sheets, measurements of shares
and revenue recognition. These guidelines are maintained by the Financial
Standards Accounting Board. While GAAP standards are complex, all
companies must follow a few key principles.
IFRS for SMEs is a modification and simplification of full IFRS aimed at
meeting the needs of private company financial reporting users and easing the
financial reporting burden on private companies through a cost-benefit
approach. IFRS for SMEs is a self-contained global accounting and financial
reporting standard applicable to the general-purpose financial statements.
The significance of International Financial Reporting Standards (IFRS) for
Small and Medium-sized Entities has immensely increased in recent years.
This paper wants to show whether IFRS for SMEs Irresistible Juggernaut for
US Financial Reporting [The Case of Small and Medium-sized Entities (SMEs)
in US]? It provides the reasons why IFRS for SMEs Irresistible Juggernaut for
US GAAP or Financial Reporting.
And, it also attempts to show efforts clearly manifested by the IFRS for SME to
have a single accounting standard worldwide. Indeed, such standards will
foster benefits to the global financial market as it introduces a new trend in the
area of financial reporting. Here, the study will to answer the question raised in
the thesis through analyzing secondary data and using personal experience.
II
Background Information
While the convergence US GAAP and IFRS continues to be a high priority on
the agendas of both Financial Accounting Standard Board (FASB) and
1
International Accounting Standard Board IASB, there are still differences
between the two GAAPs. Understanding the similarities and the differences
between US GAAP and IFRS on various basis can be
challenging because
while the principles and the conceptual frameworks for US GAAP and IRFS are
generally similar. Though this is true, accounting experts are still putting their
greatest effort to minimize the existing difference.
Accounting Summit, now in its about tenth, year is going to focus on the
convergence accounting standards (narrowing IFRS and FASB difference) since
the global economic crisis has taken hold, highlighting what’s now been
changed/amended in accounting standards globally.
And there will be
something that they may say for practitioners. Delegates will have the
opportunity to find out firsthand about the latest standards to be set by the
International Accounting Standards Board (IASB) and all the very latest
updates. The IASB who set these standards are very keen to do more for the
globe and I hope they will be outlining their aspirations during the summit.
Definition of SME
In the study we define the term “SME” to include firms with less than 500
employees and exclude firms with less than 100 employees. The focus of this
paper is to portray why IFRS for SMEs an irresistible juggernaut for US
Financial Reporting. In this paper, Private Companies mean Medium-sized
Entities (SMEs) in US. And US Financial Reporting could be mean Financial
Accounting Standard Board (FASB) or Generally Accepted Accounting Principle
(GAAP). All U.S. Private Companies or Medium-sized Entities (SMEs) are
included in the definition of “SME”.
The July 2009 release of International Financial Reporting Standards (IFRS) for
Small and Medium-sized Entities (SMEs) is a major event in the adoption of
international standards by U.S. companies. The recognition of the International
Accounting Standards Board (IASB) as a standard-setting body, IFRS for SMEs
automatically becomes an acceptable basis for accounting in the United
States. Prior to the release of IFRS for SMEs, professionals studying the U.S.
adoption of IFRS generally concluded that public companies would lead the
way in the U.S. adoption. However, since the SEC has made it clear other
problems are more pressing right now, it is quite possible that private
companies, not public ones, will lead the U.S. adoption of international
standards.
2
IFRS for SMEs is an approximately 230 page, significantly reduced and
simplified version of full IFRS. In creating IFRS for SMEs, the IASB eliminated
many accounting topics that are not generally relevant to private companies
(for example, earnings per share and segment reporting). Being based on full
IFRS and missing many accounting topics, IFRS for SMEs therefore differs
from U.S. GAAP in a variety of areas.
The IFRS for SMEs has simplifications that reflect the needs of users of SMEs'
financial statements and cost-benefit considerations. Compared with full
IFRSs, it is less complex in a number of ways.
The objective of having a single accounting standard worldwide is clearly
manifested by the IFRS for SMEs efforts. Indeed, such standards will foster
benefits to the global financial market as it introduces a new trend in the area
of financial reporting. Here, the study will to answer the question raised in the
thesis through analyzing secondary data and using personal experience. Are
IFRS for SMEs Irresistible Juggernaut for US Financial Reporting? [The Case of
Small and Medium-sized Entities (SMEs) in US]
III Literature Review
General over view of US Financial Reporting
It is expected that the next Accounting Summit is going to focus on the
convergence accounting standards (narrowing IFRS and FASB difference) since
the global economic crisis has taken hold and stressing what’s now amended in
accounting standards worldwide. While the convergence US GAAP and IFRS
continues to be a high priority on the agendas of both Financial Accounting
Standard Board (FASB) and International Accounting Standard Board IASB,
there are still differences between the two GAAPs.
US GAAP
Statements of Financial Accounting Standards - the most authoritative
GAAP setting publications. More than 150 have been issued to date.
Statements of Financial Accounting Concepts - first issued in 1978. They
are part of the FASB's conceptual framework project and set forth fundamental
objectives and concepts that the FASB use in developing future standards.
However, they are not a part of GAAP. There have been 7 concepts published to
date.
3
Interpretations - modify or extend existing standards. There have been
around 50 interpretations published to date.
Technical Bulletins - guidelines on applying standards, interpretations, and
opinions usually solves some very specific accounting issue that will not have
a significant, lasting effect.
General over view of IFRS for SMEs
Encyclopedia dictionary defines SME in different context that is according to
some countries’ definition. Though different countries have different ways of
definitions for the same idea, they all are talking almost the same language.
This free dictionary narrates the idea like this:
The abbreviation SME occurs commonly in the European Union and in
international organizations, such as the World Bank, the United Nations
and the WTO. The term small and medium-sized businesses or SMBs
has become more standard in a few other countries. EU Member States
traditionally had their own definition of what constitutes an SME. But
now the EU has started to standardize the concept. Its current definition
categorizes companies with fewer than 50 employees as "small", and
those with fewer than 250 as "medium”. By contrast, in the United
States, when small business is defined by the number of employees, it
often refers to those with less than 100 employees, while medium-sized
business often refers to those with less than 500 employees. However,
the most widely used American definition of micro-business by the
number of employees is the same of that of European Union.
(http://www.encyclopedia.thefreedictionary.com)
According to the issuance of IASB on 9 July 2009, IFRS for SMEs could be
explained within few words as follows. It is the first set of international
accounting requirements developed specifically for small and medium-sized
entities (SMEs). It has been prepared on IFRS foundations but is a stand-alone
product that is separate from the full set of International Financial Reporting
Standards (IFRSs). The IFRS for SMEs has simplifications that reflect the needs
of users of SMEs' financial statements and cost-benefit considerations.
Compared with full IFRSs, it is less complex in a number of ways.
In countries that have weak financial disclosure requirements, investors
generally demand additional financial information when companies issue
equities (stock). As a result, governments in these countries are often
compelled to revise or develop securities laws that require improved financial
4
reporting disclosure. Developing accounting and finance reporting
requirements that is: Generally Accepted Accounting Principles is a complex
and time consuming process. An easier and more effective solution is to adopt
IFRSs, which have a higher level of financial reporting disclosure than most
countries’ GAAP (Ding 2006). United States of America is one of these
countries, so need to adopt IFRS for SMEs for its financial reporting purposes.
Practically speaking, IFRS for SMEs is not viewed as an accounting framework
for entities that are not of the size nor have the resources to use full IFRS. In
the United States, the term "SME" would encompass many private companies.
Defines SME as used by IASB: Small and medium-sized entities are entities
that: (a) Do not have public accountability, and (b) Publish general purpose
financial statements for external users.
An entity has public accountability if: (a) Its debt or equity instruments are
traded in a public market or it is in the process of issuing such instruments for
trading in a public market (a domestic or foreign stock exchange or an overthe-counter market, including local and regional markets), or (b) It holds assets
in a fiduciary capacity for a broad group of outsiders as one of its primary
businesses.
The standard does not contain a limit on the size of an entity that may use the
IFRS for SMEs provided that it does not have public accountability. Nor is there
a restriction on its use by a public utility, not-for-profit entity, or public sector
entity A subsidiary whose parent or group uses full IFRSs may use the IFRS for
SMEs if the subsidiary itself does not have public accountability The standard
does not require any special approval by the owners of an SME for it to be
eligible to use the IFRS for SME Listed companies, no matter how small, may
not use the IFRS for SMEs.
[1]
(IFRS for SMES, based on the class lesson)
Limitations of US Financial Reporting and IFRS for
SMEs
There are some barriers encountered by US private companies while
implementing IFRS for SMEs. In May 2008, the AICPA called a meeting for it
wanted to know whether establishing international financial accounting and
5
reporting principles or not. And it found out that members of AICPA could have
the option to use IFRS as alternative to US GAAP. But, there were key skilled
people who were not ready and interested to use and hence IFRS for SMEs has
been ignored. Any lingering barriers may come in the form of reluctance by a
private company’s financial statement users to accept financial statements
prepared under IFRS for SMEs and a private company’s disbursement of
money, time and exertion to alter to IFRS for SMEs. (AICPA | www.IFRS.com)
[1]
(IFRS for SMES, based on the class lesson)
6
To make the above statements crystal clear, it could probably be better to show the
idea in a table. Some constraints that could be observable while putting US Financial
Reporting and
IFRS for SMEs in to practice as compared with US Financial Reporting
are presented in the following manner:
US Financial Reporting
IFRS for SMEs
Cost-benefit relationship states that the
benefit of providing the financial information
should also be weighed against the cost of
providing it.
-Lack of
key professionals in the
field or area of the study because of time
and awareness
A Deloitte (United States) survey published
in July 2009 shows that 43% of SME
respondents are not aware of the IASB's
standard IFRS for SMEs, indicating the
need for more education.
Weak Financial Disclosure pensions, -Companies may incur a lot of costs while
leases and financial instruments
Industry
practices
accounting
procedures
industry practices
states
should
implementing IFRS for SMEs for the first time
that
follow
-Companies would have more expenditure
of time and effort to convert to IFRS for
SMEs.
Conservatism states that when choosing
between two solutions, the one that will be
least likely to overstate assets and income
should be picked.
Materiality states that the significance of
an item should be considered when it is
reported. An item is considered significant
when it would affect the decision of a
reasonable individual.
7
IFRS for SMEs and its Advantages over US Financial
Reporting
Volume
John L. Daly (2008) portrayed that the volume of IFRS for SMEs is so short as
compared with both full IFRS and FASB. He added that the full text runs only 232
leaves. This as compared to the 2,500 pages for full IFRS and 25,000 for US GAAP
would be the good news that everybody may wants to listen to.
IFRS for SMEs is not some rigorously scaled-down standard intended and designed for
third world countries, but a wide-ranging principles-based standard.
IFRS for SMEs is designed to help entities to meet their specific needs. It reliefs
them from using the full IFRS that could have been their most unresolved
problem while applying. (Video on the Convergence of Accounting
Standards)
Simplicity
John L. Daly (2008) depicts that there is extra news for most US Accountants
because the standards discussed in IFRS for SMEs looks familiar and common
to them yet, there are also unfamiliar term.
Simplicity is a common character in IFRS for SMEs. For instance, we can assume
omission of LIFO during inventory. (http:\\www.isaplus: Small and Medium sized Entities)
IFRS for SMEs specifies Financial Statement footnotes must be in a systematic
order and that companies must cross-reference them to the financial
statements. This is a common-sense improvement to the readability of
financial statement (John L. Daly 2008).
simplified guidance on computing
impairment of goodwill especially when goodwill cannot be allocated
to cash generating units. (http:\\www.isaplus: Small and Medium sized
IFRS
for
SMEs
is
a
plainly
Entities)
Reduction in Disclosure Requirements
Reduction in disclosure requirements are substantially reduced in IFRS for
SMEs. The requirements for disclosure encouraged by the full IFRS is omitted
for accounting policy options and cost benefit considerations reasons (July
2009 http://go.for.iasb.org/IFRSforSMEs )
8
In countries that have weak financial disclosure requires developing accounting
and finance reporting. Which one of the two standards fulfills the full
disclosure requirements? Is it GAAP or IFRS for SMEs? Regardless of this
question, one researcher (Ding 2006) suggests that Generally Accepted
Accounting Principles is a complex and time consuming process. An easier and
more effective solution is to adopt IFRS, which have a higher level of financial
reporting disclosure than most countries’ GAAP.
Internationalization of SMEs
Internationalization of SMEs or globalization (most evolved form) of SMEs is
attaining higher and higher through a variety of development modes. That
might include: exporting; licensing; franchising; management contract; etc. (R
Cressy, B Gandemo and Olofsson1996)
Two researchers (Carter and Evans) state that internationally active SMEs are
growing faster. These internationally active SMEs are growing faster than their
domestic counterparts….while, those in traditional industries (around 50%)
internationalize incrementally via exporting. It would, indeed, appear that most
SMEs now see internationalization as not only fashionable, but imperative
(Sara Carter and Dylan Jones Evans 2000).
The globalization and increasing competition point out the significance of
understanding how SMEs internationalize and how their network environment
influences the internationalization process.
Do Private Companies in the United States prefer to prepare its
financial statements in accordance with IFRS for SMEs?
Yes, they need it for various purposes and want to fulfill their specific need and requirements.
For instance, private U.S. Company would prepare IFRS for SMEs based on their particular
financial statements. The financial users might believe that IFRS for SMEs simplified and an
attractive alternative to the more complicated and voluminous U.S. GAAP. (FAQ IFRS for
SMEs available: http://www.ifrs.com)
Those private companies in US found IFRS for SMEs a more relevant and less costly reporting
standard than US Financial Reporting.
The other IFRS for SMEs users can be private companies owned by foreign investor or supplier
by foreign companies.
9
IV Statement of the Problem
Are International Financial Reporting Standards (IFRS) for SMEs unstoppable
and irresistible from being applied by US Financial Reporting? Do Small and
Medium-sized Entities (SMEs) in US need implementing IFRS for SMEs? How
could IFRS for SMEs be an irresistible juggernaut for US GAAP? Are IFRS for
Medium-sized Entities uncontrollable to the US Financial Reporting? How does
this study entertain the case of Small and Medium-sized Entities (SMEs) in
US? Are IFRS for SMEs intended to be used by private companies in US? How
far is worldwide acceptance of IFRS for SMEs for US financial reporting?
May be the above questions have been there for several years but, some of
them could still have not been answered satisfactorily. To answer these
questions, we may need both extensive and intensive work for they seem worth
studying and vast in nature. The questions that are raised in this paper might
be really in need of solid and simple answers, not ideas beating around the
bush. They need a concise answer, not clumsy and jumbled one.
Having the answer for the mentioned questions mean, making entities to
become aware of what IFRS for SMEs is intending for. And, the importance of
IFRS for SMEs in handling financial reports will be revealed and how crucial
they are in bridging the financial reporting gap between SMEs in US and SMEs
in other parts of the world.
Answering the stated questions mean a lot. It could explain why private
company in the U.S. may decide to use IFRS for SMEs. It further expresses
why ever increasing amount of private companies are looking to conduct
business outside the Unites States and obtain foreign financing. Using a
common global financial accounting and reporting standard, like IFRS for
10
SMEs, increases comparability between companies and improves the efficiency
of conducting business across borders. Users of private company financial
statements prepared in accordance with IFRS for SMEs would benefit from a
common global standard. In conducting business with private companies in
different countries, lenders, venture capitalists and other users would just
need to understand and work with one financial accounting and reporting
standard.
It would put one in a better understanding of IFRS for SMEs in respective to
US GAAP and give the impression how far the standards are becoming
influential in the accounting world. It would also help one to know how far
worldwide acceptance of IFRS for SMEs for US financial reporting.
V Presentation (of the work)
First, the study started providing the definition of SMEs in order to wipe away
an ambiguity while seeking the answer to the problem and then assessed the
general over view of US Financial Reporting and IFRS for SMEs. The focus the
study went to the limitations of US Financial Reporting and IFRS for SMEs and
leaped to Advantages IFRS for SMEs
The financial users believe that IFRS for SMEs simplified and an attractive
alternative to the more complicated and voluminous U.S. GAAP. Perhaps, here,
there exists one of the reasons that why companies in the United States will
convert their financial reporting to IFRS for SMEs
This paper entertains the easiness of applying IFRS for SMEs while reporting.
Simplicity is a Pivotal point for most SMEs in US for no entity wants to report
its financial activities in a most complex and time taking way as far as there is
IFRS for SMEs which is clear, easy and effective. The theme of the problem
could be asked here, are IFRS for SMEs Irresistible Juggernaut for US
Financial Reporting?
In countries that have weak financial disclosure requires developing accounting
and finance reporting. Which one of the two standards fulfills the full
disclosure requirements? Is it GAAP or IFRS for SMEs? Regardless of this
question, one researcher (Ding 2006) suggests that Generally Accepted
11
Accounting Principles is a complex and time consuming process. An easier and
more effective solution is to adopt IFRS, which have a higher level of financial
reporting disclosure than most countries’ GAAP.
Having above discussed points and the writer’s suggestion in mind, one could
also guess that US need to adopt IFRS for SMEs for its financial reporting
purposes. So, IFRS for SMEs are irresistible to US GAAP.
Internationalization SMEs is interesting because of its economic and political
importance. SMEs are the largest source of employment. Hence, this study can
now suggest what would be the direct and indirect influence of the
international transaction on the futurity of US financial reporting status. Here
the paper indicating that United States of America need to establish and
conduct transaction with other countries.
In the preceding sections, the
reasons why private U.S. companies would
prefer to prepare their financial reporting using IFRS for SMEs are vividly
forwarded. Therefore, this may imply that IFRS for SMEs are becoming An
Irresistible Juggernaut for US Financial Reporting.
VI Conclusion and Recommendation
This study reviews International Financial Report for Small and Medium sized
Entities and how their use has recently increased in U.S.A. IFRS for SMEs is
favorable to Small and Medium sized Entities in its nature of simplicity and in
the reduction of disclosure requirements. It is also preferred by most US
Private Companies for the propose reporting financial status. Hence, IFRS for
SMEs are becoming imminent to be irresistible to replace US GAAP
Currently, this study reveals that globalization and increasing competition
point out the significance of understanding how SMEs internationalize and how
their network environment influences the internationalization process.
Internationalization SMEs is interesting because of its economic and political
importance. SMEs are the largest source of employment. Hence, one can have
a review of how the direct and indirect influence of the international
transaction on the futurity of US financial reporting status is. U.S. needs to
establish and conduct transaction with other countries. This means, it leaves
US with a no go decision to develop and adopt IFRS for SMEs. If it rejects
adopting the standards, there would always be home works to be done that in
turn could take private companies in US nowhere (makes them incompetent).
12
So, bearing this in mind, it could be pointed out that IFRS for SMEs are
possibly irresistible juggernaut to US Financial Reporting.
On the other hand, IFRS for SMEs is building on the idea of sameness (readily
understood by common sense), Simplicity (in application) and familiarity (with
accountants) to facilitate the ground for the creation of common accounting
(economic) language ever been done. This means many Private companies in
the United States now have another more simplified accounting and financial
reporting option. Accountants in the United States and the profession must
keep pace with IFRS. A private company in the United States chooses to
prepare its financial statements in accordance with IFRS for SMEs Hence, the
above realities or evidences would reveal that IFRS for SMEs might be
irresistible juggernaut to US Financial Reporting in the next few years.
Future research could consider the use of IFRS for SMEs by U.S. publicly held
companies and may closely see the need for effective training and education for
currently most U.S. accountants in the United States are not trained in IFRS.
Future research evaluates companies who are converting to IFRS for SMEs.
Future research looks in to companies that are confronted with the lack of
general accepted ways of applying these standards. Moreover, future research
could develop simplifying IFRSs as part of the process for developing
accounting standards for SMEs and future research could investigate the
benefits and problems associated with IFRS for SMEs. Future research tries to
reach out whether adoption of IFRS for SMEs leads to easier access by private
companies to capital market and financial transparency.
13
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www://ifrsforsmes , © 2009 Deloitte Touche Tohmatsu
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www.ifrs.com , 10/14/2009
of
Accounting
www.deloitte.com/about 10-11-2009, 12:05 PM
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